Trade, Jobs and Wages
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Trade, Jobs and Wages

Hian Teck Hoon

The world’s increasing integration through trade and the persistence of high unemployment in Europe, and other areas of the world, highlight the need to understand the implications of free trade for unemployment. Trade, Jobs and Wages analyses how employment levels and real wages are affected by international trade. Popular trade theory disregards the impact of free trade on the rate of unemployment, since it assumes full employment at the outset. By focusing on the determinants of the natural rate of unemployment, Professor Hoon places an emphasis on real, as opposed to monetary, factors in accounting for long term trends in wages and unemployment.
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Chapter 3: The Ricardian Model with an Endogenous Natural Rate

Hian Teck Hoon


INTRODUCTION 3.1 In Chapter 1, we made the point that there appear to be two traditions in the treatment (or non-treatment) of unemployment in the international economics literature. On the real side of international economics, full employment is typically assumed though there is a small amount of literature dealing with the effects of minimum wages (see, for example, Brecher, 1974). Efficiency wages have also been introduced into a Ricardian economy by Copeland (1989), whose model nevertheless generates an endogenous wage gap among identical workers without generating equilibrium unemployment. On the monetary side of international economics, the prevailing paradigm is that of Keynesian economics applied to the open economy. The result is the Mundell–Fleming model.1 We can rationalise this division by alluding to the classical dichotomy. In the short run – the domain covered by the monetary side of international economics – the price level is somewhat rigid or sticky. Consequently, unemployment, which is viewed from this perspective as cyclical in character, fluctuates in response to various economic shocks. In the long run – the domain covered by the real side of international economics – the price level is completely flexible, and the economy settles at the natural level of employment or unemployment. Thus the theory has explanatory power for improving our understanding of what causes unemployment to deviate from the natural level. However, the economic forces that lead countries to exchange goods and services with one another and that affect the real incomes of factors of production under international exchange...

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